Vodafone’s India tax victory may come with a twist

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Vodafone’s victory over India’s tax authorities may have a sting in the tail. The UK phone giant’s $2.2 billion Supreme Court win is a boost to India’s battered reputation. It also bodes well for firms such as AT&T, which are threatened with similar tax bills. But if the government now changes the law, future offshore M&A deals may not escape so easily.

The verdict is clearly great news for Vodafone, which had set aside $5 billion in case the ruling went against it and it had to pay penalties on top of its tax bill.

It also looks promising for other firms which have been threatened with similar cases. These includes the likes of SABMiller, which has a pending case related to its 2006 purchase of the Indian division of Fosters, and multinationals including AT&T, E*Trade and Kraft.

And even though the ruling is bad for the Indian government’s coffers, it is good news for the country’s international standing. Foreign investors and even domestic firms appear genuinely delighted that the court has taken what they see as a fair legal decision rather than blindly siding with the government.

Vodafone argued successfully that the Indian government has no jurisdiction over a transaction between two foreign companies occurring on foreign soil. In no other major economy would a similar transaction between two foreign entities have faced such taxes. What’s more, if anyone was liable for tax it should have been the seller, Hutchison Whampoa, rather than Vodafone.

Yet while the legal case was straightforward, there is a strong moral counterargument. The business that changed hands was entirely based in India. While it’s good news that the rule of law has been upheld, the law can be changed.

The end of the legal battle gives the Indian government an opportunity to reflect on whether to bring new legislation. Other countries have struggled to tax the sale and purchase of assets that are controlled by offshore companies. But that doesn’t mean India shouldn’t try.